David Stockman: Soak the Rich

By

Robert Milburn

October 12, 2013

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By

Robert Milburn

October 12, 2013

David Stockman is at it again. The Reagan-era budget director caused an uproar in 1981 by publicly decrying the moves of his boss to spur the economy with tax cuts. Now a private investor and author, he's pushing for a huge new tax on big earners. Stockman would subject the nation's top 10% of households to a levy equal to 30% of their wealth, payable over a decade. Without it, he maintains, the U.S. will wind up in a horrific, Greece-style debt wreck.

Stockman, 66 years old, recently talked up his plan at an unlikely forum: New York City Junto, a monthly soirée of libertarians organized by hedge-fund manager Victor Niederhoffer. The tax-averse crowd listened politely as Stockman laid out his case. For starters, he said, the long-term budget outlook is much bleaker than the "rosy, Keynesian nonsense" put out by the Congressional Budget Office. Stockman reckons U.S. debt, now $17 trillion, is headed to $30 trillion, or 150% to 200% of gross domestic product. "That is a nonstarter, and that takes the system down," Stockman said. The CBO's baseline projection puts debt at 130% of GDP by 2050.

The wealth tax, Stockman said, could go a long way toward stabilizing things. It would be part of a broad package of measures he has in mind to bring the deficit down and keep it low. The tax wouldn't be permanent—it could be lifted in 10 years or so, when debt has dropped to a more manageable 30% of GDP. Interestingly, Stockman, a multimillionaire, would be subject to his own tax.

Deeply cynical about Washington, Stockman has stuffed most of his own millions into short-term bonds.
Caryl Englander/Bloomberg News

But Stockman is the first to admit that the proposal may never fly in Washington. "I'm a pessimist, so I think we're going down the drain and can't restore free-market capitalism, because it's politically unrealistic to say that we can stop this enormous doomsday machine," he said.

He scoffed at the current happenings in Washington, saying threats of a default are all but hollow. Having overseen four government shutdowns himself while at the Office of Management and Budget under Reagan, he explained, "The untold truth of the matter is that there is nothing in the Constitution or law that says if the secretary of Treasury runs out of borrowing authority that he cannot prioritize, allocate, and use the available revenue flow to meet important requirements." Essentially, the Treasury has the power to ensure the U.S. does not default by making sure its $30 billion or so in monthly interest payments are funded with some of its $200 billion-plus in monthly tax revenue, he said. Others say that even prioritizing would be perceived by the world as default.

Stockman has always sparked controversy. In his 1986 memoir, The Triumph of Politics: Why the Reagan Revolution Failed, he famously bashed President Ronald Reagan, his followers, and their supply-side economics—the idea that upper-bracket tax cuts spur economic growth.

After nearly 30 years in private business, Stockman re-entered the political fray earlier this year with a best-selling book, The Great Deformation: The Corruption of Capitalism in America.

In typical fashion, the book decries politicians on the left and right, accusing both of perverting free markets and laying the seeds of the financial crisis.

Politicians aren't the only problem. Stockman sees the Federal Reserve, starting in the Greenspan era, as a serial stock-market bubble maker; he points to the dot-com implosion and the Great Recession as Fed-manufactured crises fueled by historically low interest rates. Unlike many critics, Stockman does not see hyperinflation in the offing right now. Instead, his big fear is that the Fed is once again overheating the stock market.

He has positioned his own investible assets for the worst, essentially stuffing them under the mattress. He told the Niederhoffer gathering that all of his money is earning nominal returns of about 0.4%, mostly in short-duration bonds, a preservation position he calls ABCD—anything Bernanke can't destroy.

WHEN STOCKMAN WRAPPED UP, Niederhoffer stepped to the podium and bluntly disagreed. Handing Stockman his check for the speaking engagement, Niederhoffer called Stockman's investment ideas "propaganda" and pleaded that the audience not follow his advice. "No one believes what David believes because you'd be bankrupted over and over again if his advice were applied in the past," he said. He cited numerous studies that show the stock market's long-term appreciation. Market maven Jeremy Siegel, for instance, has reported that stocks returned an inflation-adjusted average of 6.4% a year for the past 141 years.

Stockman listened patiently, but the two found no middle ground. "Vic, now that I have your money, I feel that I can respond," Stockman quipped. Fiscal and monetary policies, he explained, can greatly affect investment outcomes, and therefore what happened over the past 100 years is not a sequence of timeless truisms. "It is an unfolding history in the context of what the state is doing, and we have been steadily drifting from sound economics, sound markets, sound money, and sound fiscal policy," said Stockman.

Who will prove to be correct? We tend to side with Niederhoffer. Through good public policy and bad, stocks usually pull through for the long haul.

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